Vhari McWha: Spending, revenue expected to rise

Vhari McWha

In this election year, with an operating surplus of close to $6 billion, economists were bracing themselves for a fiscal splurge.

Michael Cullen described it as the last of the big Budget spend-ups as the economy has peaked and the Treasury has told him that growth will ease over the next two years.

The Treasury has produced a well-reasoned and non-controversial forecast of the key macroeconomic indicators.

They are expecting growth to slow due to high exchange and interest rates, declining net migrant inflows, slower trading partner growth and a decline in the relative price of our exports compared with imports.

This Budget has continued the Government's prudent fiscal policy. Although spending is expected to increase, so is revenue. The operating surplus is forecast by the Treasury to remain robust over the next few years.

Steady progress will be made towards the key fiscal objective - gross sovereign issued debt is expected to decline to 20.2 per cent of GDP by the 2009.

Cullen has pointed out over the past few years that households are not good at saving.

The Treasury has estimated the cost of the KiwiSaver programme on the basis that 25 per cent of employees will participate.

I asked a Treasury official to what extent they estimate that savings will increase as a result of the KiwiSaver policy (rather than simply moving people's existing savings into the new scheme)?

The ideal outcome for the Government would be that existing savings would continue and more people would save. This would reduce private consumption, improve the household savings rate and shrink the current account deficit.

There was no answer available from the Treasury. Typically, though, we would expect a relatively large degree of replacement, rather than new saving.

The second leg of the KiwiSaver package - the first home-buyer grant - will result in some twisted incentives.

The worst-case scenario is that there is a slump in activity in the low end of the housing market as potential buyers sit out the lag until they become eligible for the new subsidy.

There is no clear economic rationale for favouring investment in a home to other types of assets.

The Government has also made some changes to tax in this Budget, which are generally well-reasoned but surprising in their scope.

The funding for the tax changes is coming from the carbon charge.

This charge is expected to reduce economic activity.

The changes for businesses are positive in terms of removing existing distortions in investment, reducing compliance costs and easing cashflow issues for small- and medium-size businesses.

In aggregate, though, the effect on business investment or productivity and, hence, GDP is likely to be minimal. 

 * Vhari McWha is deputy director of the NZIER